Hazlett v. Suburban Tractor Co. (In Re Palmer)
2007 Bankr. LEXIS 988, 365 B.R. 816, 2007 WL 949801 (2007)
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Rule of Law:
A secured creditor may rely on a debtor's unambiguous written representation in loan documents that goods will be used for personal, family, or household purposes. This classification of collateral as 'consumer goods' is determined at the time the security interest is created, allowing for automatic perfection of a purchase-money security interest without the filing of a financing statement, even if the debtor's actual use differs.
Facts:
- On January 12, 2005, Joseph M. Palmer executed a retail installment contract with Suburban Tractor Company to finance the purchase of a compact utility tractor and front loader.
- The contract stated, 'Unless I otherwise certify below, this is a consumer credit transaction and the Goods will be used primarily for personal, family or household purposes.'
- The contract also contained a 'Commercial Purpose Affidavit' section, which Palmer left blank and unsigned.
- Suburban Tractor Company subsequently assigned the contract to Deere & Company.
- Neither Suburban nor Deere filed a UCC financing statement to give public notice of the security interest in the equipment.
- Palmer operated Palmer Kennels, a business for training racing greyhounds, on his property.
- Palmer later testified that he purchased the tractor primarily for use in his training business to haul supplies and maintain the kennels.
- On August 10, 2005, Palmer and his wife filed for Chapter 7 bankruptcy.
Procedural Posture:
- Joseph M. Palmer and his wife filed a joint Chapter 7 bankruptcy petition in the U.S. Bankruptcy Court for the Southern District of Ohio.
- Thomas McK. Hazlett was appointed as the Chapter 7 Trustee for the bankruptcy estate.
- Hazlett, acting as Trustee, filed an adversary proceeding complaint against Deere & Company, seeking to avoid Deere's security interest in the equipment under his 'strong-arm' powers.
- Deere & Company filed an Amended Motion for Summary Judgment, arguing its security interest was properly perfected and not subject to avoidance.
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Issue:
Does a creditor's purchase-money security interest in goods automatically perfect as 'consumer goods' when the debtor represents in writing that the goods are for personal use, even if the debtor later actually uses them for business purposes?
Opinions:
Majority - Hoffman, Jr., J.
Yes. A creditor is entitled to rely on a debtor's affirmative written representation that goods are for personal use to classify them as 'consumer goods,' which perfects a purchase-money security interest automatically upon attachment without filing a financing statement. The classification of collateral is determined at the time the security interest is created, not by the debtor's subsequent actual use. The contract plainly stated it was a consumer credit transaction, and Palmer made an affirmative representation by not signing the commercial use affidavit. In the absence of evidence that the debtor informed the creditor of a business use at the time of purchase, or that the creditor knew or should have known of the business use, the creditor's reliance on the written agreement is protected. The Trustee failed to provide admissible evidence to create a genuine issue of material fact that Deere knew or should have known the equipment was for commercial purposes.
Analysis:
This decision reinforces the principle that the classification of collateral under the UCC is determined at the time the security interest attaches. It provides significant protection to consumer lenders by allowing them to rely on the debtor's written representations, thereby reducing transaction costs by eliminating the need to file financing statements for what appear to be consumer goods. This bright-line rule creates certainty for creditors but may pose a risk to subsequent purchasers or creditors who might observe the goods being used in a commercial capacity and mistakenly assume they are unencumbered after finding no UCC filing.
